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Ohio Supreme Court holds Lessors Adequately Protected

Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.

In a decision issued January 3, 2018, in Alford v. Collins-McGregor Operating Co., Slip Opinion No. 2018-Ohio-8, the Ohio Supreme Court held that Ohio does not recognize an implied covenant to explore further separate and apart from the implied covenant of reasonable development.

In this case, one well was drilled in 1981 and producing from the Gordon Sand formation.  The lessor sought to cancel the lease to depths below the Gordon Sand (including the Utica and Marcellus formations) due to the lessee’s failure to explore those deeper formations. 

The Court acknowledged that oil and gas leases are ordinarily subject to an implied covenant to reasonably develop the land (unless the parties contract otherwise or waive the implied covenant).  In following prior precedent from Texas and Oklahoma, the Court agreed with the lessee, that although the lessors have an interest in development of the land, that interest is sufficiently protected by the implied covenant of reasonable development, and therefore rejected any implied covenant to explore further. 

Although the Court rejected the implied covenant to explore further (and therefore lessors’ effort at horizontally forfeiture of the lease in this case), the Court specifically left open the possibility of horizontal forfeiture under the implied covenant of reasonable development.  In fact, the Court noted that implied covenant was well suited to address the primary driver of the lessors’ interests, namely the emergence of new drilling technologies permitting production from deep strata that could not be obtained before.  However, because the lessor raised only the implied covenant of further development on appeal, the Ohio Supreme Court did not express any opinion as to how a prudent operator would or would not employ new deep-drilling technologies. 

The Court did note that the implied covenant of reasonable development would focus on all facts and circumstances relevant to development, having due consideration for the interest of both the lessor and lessee, including what is known about the market, the geology and adjoining activity.

NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.

 
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